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Tuesday, November 29, 2022

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Which Way Wednesday – The Beige Book Boogie

The last Beige Book report was on September 9th.

At the time the Dow was looking toppy at 9,650 and we had poor consumer confidence numbers (just like yesterday) and poor consumer credit number (no change) and the book had very little "good" news to report (see my analysis) – Yet the market broke over 9,600 again that day and then took off all the way to 9,900 a week later.  At the time, we were looking for any excuse to go higher on the hopes that this earnings period will look like last one but have we now come too far, too fast?

It seems we are finally hitting the point of diminishing returns for earnings.  Expectations have finally gotten so high that even big beats aren’t enough to keep the momentum going. 

Last earnings Q, we were down from 8,900 in June to 8,100 on July 9th as companies began reporting and we had a nice, 1,000-point relief rally over the first two weeks of earnings.  This time, we went up an additional 500 points in the past two weeks, over our 9,600 line and that has been in anticipation of a repeat of last earnings but the circumstances are very different this time and it takes a lot to justify a 20% run off the July lows. 

Keep in mind that, looking at the sector charts, Energy, Materials and Tech are leading us.  Since semiconductors are simply another form of commodity – this is almost entirely a commodity rally in the midst of a recession with Consumer Staples, Financials, Health Care, Industrials, Telcom, Utilities and Transports all underperforming the rest of the S&P.  As I keep saying – if no one is shipping anything, how the hell can we be having a proper recovery?

The Beige book is an anecdotal view of the economy gathered roughly through the middle of October and we've seen no improvement in Jobs since the Sept 9th report, Cash for Clunkers ground to a halt and, just this morning, we got a horrific 13.7% decrease in the number of mortgage applications from the previous week.  That number includes "seasonal adjustments," without adjustments, morgage apps plunged 22.4% despite record low rates as government assistance begins to peter out.  The Refinance Index, also adjusted for the holiday, decreased 16.8 percent from the previous week and the seasonally adjusted Purchase Index decreased 7.6 percent from one week earlier.  The unadjusted Purchase Index decreased 16.7 percent compared with the previous week and was 3.4 percent lower than the same week one year ago.

Clearly the earnings reports that are coming in are still doing so mainly on cost cutting, not any underlying improvement in sales.  This week we had GCI with a beat but earnings are down 18%, some other notable revenue numbers are: PETS +5%, WFT -15%, AAPL + 25%, STLD – 54%, TXN -15%, WERN – 26%, EAT – 21%, CAT – 44%, KO – 4%, DRH – 15%, DD – 18%, GAP -5% (that's food!), ITW – 20%, LXK – 15%, EDU +26%, OXPS – 7%, BTU + 24%, PCP – 27%, SHW – 12%, UAUA – 20%, UNH + 8%, WU – 5%, CNI -16%, CREE + 20%, GILD + 31%, ISRG + 19%, NBR – 44%, SNDK + 14%, STX – 12%, STM – 23%, YHOO – 14%, AAI – 11%, APD – 21%, ATI – 50%, CAL – 20%, MAN (jobs) – 26%, SWK – 16%…  

So we get a general impression that sales are off about 15% from last year.  Last year's Q3 wasn't that great you know, the market collapsed in September so we already knew things were falling apart last Q3 so these are not tough revenue comps we are facing.  AFTER getting the revenue and profit numbers last October, the market went down considerably.  Should we be concerned?  Of course we should, any rational person would be but the markets are clearly IRRATIONAL right now so we are playing the market, not the data. 

We have to willingly suspend our disbelief in order to play these markets and our play mix, though still cautious, is reflecting that forced change in attitude.  Sure we still look at the data, but we do so while keeping in mind the great Bill Murray's advice – "It just doesn't matter!"  As fundamentalists, of course we believe it will matter, A LOT, one day, but we're well prepared for that turn.  Meanwhile, let's keep playing the cards we're dealt.

So what if no one is buying houses – they don't have jobs anyway so that's just 13.7% less people who are likely to default on their mortgage.  That must be good for banks right?  Goldman Sach's International Advisor, Brian Griffiths had the same advice as he spoke yesterday defending compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy.  “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.”  So don't complain about GS taking record bonuses less than a year after we bailed them out for wrecking the US Economy, they are only making this money FOR YOU! 

This is the same logic under which the entire market is celebrating our drastic reduction in the workforce.  For more than a decade, we've been shifting millions of jobs overseas and it made companies more profitable but there had always been a fear of a backlash against outsourcing if the companies slashed workforces as well.  Our little collapse last year took the stigma out of layoffs and suddenly they were in vogue – everyone is doing it and now the corporations have gotten rid of the "dead weight" of the American workers and now their plans are to focus more on the foreign consumers as these losers in America are all tapped out.  This is just the same sort of slash and burn capitalism that US multi-nationals have practiced globally for decades only now it's the US that's being cut loose as the corporations move on to greener pastures

As good little capitalists, we'll try not to care and we've been focusing our capital on companies that do not need the American consumer to succeed.  Yesterday's trade ideas for Members were a fun mix:  TBT up, ZION bounce, Dow down (rolling puts higher), ISRG flat (wide spread sold), HGSI flat to up, EDZ flat to up, SNDK flat (sold Nov $22s for $1.33 in a spread), JNJ flat to up and then, at 3:15, I sent out an Alert to Members for 6 earnings plays.  This is something we're trying to do every day, set up quick pre-earnings plays to make very nice one-day profits.  Of course it helps to get things right but that's where fundamentals DO come into play.  The trade ideas were:

  • STX has flown so I like the Jan $17.50s for .65, selling the Nov $16s for .60 (net .05).  My expectation is they disappoint but then hopefully recover on a Santa Clause run after earnings.
  • SONC June $10/12.50 bull call spread for net $1.20 (SONC is at $11).  Just a bullish bet. 
  • TUP is interesting as they are at ATH and probably worth it.  Apr $40/45 bull call spread is net $2.30.  3x of those and selling a Dec $45 for $2.30 gives you one for free!
  • APD likely to look like DD – will show good numbers but so what.  Dec $85/80 bear put spread is $2.20, might be a good chance to take out $80 putter on a spike up.
  • CAL is one I do like at net $13.80 so selling naked Dec $15 puts for $1.20.
  • MS Jan $31/32 bull call spread is at .40 is just fun.

We'll see how these go but they seem pretty much on track so far – 6 for 6 would be nice.  Ideally these are quick trades that pay a quick 20% or better and if we allocate, for example, $1,000 to each trade we can make $1,000 even if one play doesn't pan out and then we can turn that one into a longer spread that will pay off over time.  TUP fits our international theme of doing business outside the US while cutting dead weight and MS was obvious.  CAL we're happy to own long-term, SONC as well and STX and APD were both plays that come about based on our observations of their peers who have already reported. 

This is how we're playing earnings this quarter.  It's not so much about whether or not we like the company long-term, long-term investing is a very dangerous thing!  This is about getting the sentiment right and using our normal option strategies to take advantage of the imbalances caused by a combination of earnings volatility and a totally irrational market – it's a great combination from our side of the table! 

On the other side of the globe, Asia had a mild pullback this morning on no particular news – just following our lead yesterday.  "We have seen broad-based falls in line with Wall Street, but it's been fairly muted," said Marcus Droga, private client adviser with Macquarie Private Wealth. Mr. Droga said he expected subdued trade before a slew of major Chinese economic data on Thursday, including third-quarter gross domestic product and September figures for inflation, industrial production and fixed asset investments.

Moody's economy.com associate economist Alaistair Chan wrote in a report the data will likely show continued improvements in the key indicators. "The government is attempting to stem the rise in overcapacity, but this will be hampered by its inability to remove stimulus measures, given that the economy is so dependent on them," Mr. Chan added.

Europe is down about 0.75%, as of 9am, despite huge numbers from DB, who tripled last year's profits, making $2.1Bn for the quarter.  10% of the profits came from tax gains and that sent shares DOWN 3.5% despite the great numbers.  As I said above, we may be reaching the point of diminishing returns for earnings, where almost nothing is good enough other than grand slam home runs like AAPL and GOOG had. 

As usual, we'll be looking for a good DIA spread ahead of the Beige Book.  Unfortunately, it's a long way to options expiration so there are no "cheap" contracts to be had like we did last time, when we picked up a 150% winner.  We'll likely take advantage of morning weakness to establish a long position – after all, we're bullish now – or at least we're trying to be

 

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Here is my man Volcker:
 
He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.
“I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”
The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.
Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.
 
 
So.  There it is.  The smartie pants young  whipper snappers are saying no to the man who saved us from run away inflation.  They think they can regulate human nature.  They can’t.  This is what I’ve been afraid of happening.  Someone of huge stature, who just so happens to agree with me (not so huge stature), saying the banks should be split up and the big government Democrats are saying ‘no’ we can have our cake and eat it, too.
 
I’m done.  I’m no longer a supporter of Obama’s.  He is playing a fool’s game. 

Me neither; I am no longer a supporter of Obama …
 
😉

Woooo Palin/Limbaugh 2012!

NLY vs AGNC / dflam & Phil: Thanks!

 Phil,
 
"The Warning" on PBS tonight could be a game changer.

people watch PBS ?

 Phil, I’m still shaking my head. I bought SRS calls at .90 shortly before they jumped 38%.
I plan to buy as SRS goes down. There will be a payoff.

NO NO NO, you guys are looking at all the wrong reasons why this market went down, Lets be serious, your telling me with all the headwinds we have faced (facing) the market should be at 10k. NO of course not. News has nothing to do with the markets movement. Its all about levels and breaking them….simply we hit 10117 on the 19th and we hit 10119 today without any follow through. Traders waited for the afternoon pump that failed and hence the sell off, don’t kid yourself that we went for any other reason.
 

someone dumping SPG after hours….

oldgoat should be interesting, they’ve been advertising all week on YouTube…too bad they didnt cancel dancing with the stars im betting 6 people will watch it

 maybe it was galleon unwinding their funds…

 Kustomz,  Could you explain your message? I don’t get it.

I know some of you will role your eyes and say, "figures" but I love PBS.  But I hadn’t hear of that program so I will definately check it out.  Thanks you oldGoat!

Sorry oldgoat, PBS has been advert sing the program on youtube. The dancing with the stars comment points to the fact that most Americans could care less and would rather watch dancing with the stars hence the 6 people that will watch PBS this evening, so far you matt and I account for 50% of viewers 😉

Phil, what say you on some near term BIDU calls?? Everybody is expecting this thing to rise after earnings report like Google. 

I see an after hour quote for AAPL at $205.15.  So what does "AAPL flushed stops to $198.76 after hours – Cramer may as well just bend his viewers over his desk and rape them on TV" mean?  Sorry – a newb i am.   

LMAO booya!

Phil i was simply stating the fact that the markets pay no attention to news. Good way to flush out the weak hands for  next leg up. Simply look at the Dow chart over the past 3 months, with every rise theres a quick dip then the next step up. Im not sure if the next step will be completed but im sure they are going to try regardless of news.

Phil, that’s right!  I’d forgotten all about your Fast Money comment.  It didn’t really strike me as contrarian at the time because I was battling an ICE fire at the time and anything seemed plausible.
 
So what the hell did they have to say for themselves on the show tonight?  I’m still at work and can’t watch.  You know they are ‘in’ on the game but boy, they’ve got some serious ‘splaining’ to do!
 
Kuz, I think the oldGoat was referring to your earlier comment about why we sold off today and why it doesn’t mean anything out of the ordinary.

lol matt im sure og was referring to my dancing with the stars comment, but i can clearly see that your stumped by the comments. I have held on to the belief they take the markets to current levels, but why stop here? There would have to be some very very damaging news to send us into a free fall. With the Gov and the Fed pulling out all the stops and liquidity up the wazoo i have to be realistic and remember that people are greedy by nature.

CNBC pulling out the stops to comfort the retail trader.

Well it could have been Galleon unwinding and buying short triples to profit from their crisis; not much technical damage. I agree with kustomz, we’ll be higher next week, the question is how to play tomorrow. And we won’t know that untill about 9:00.

LMAO i was wondering what was holding HCBK up today after earnings and during the sell off, well well well JC will have the CEO on Mad Money tonight

Transports got creamed today, if someone from the Fed talks up the dollar (for a change) i would look for some gains in that sector

this is taken from HCBK earnings summary
Through the first nine months of 2009, we sold 40 foreclosed properties. It is currently taking up to 30 months to foreclose on a loan once it becomes non-performing.

Through the first nine months of 2009, we sold 40 foreclosed properties. It is currently taking up to 30 months to foreclose on a loan once it becomes non-performing
 
30 months?  They have got to be kidding..
 
Kuz, I, too seriously doubt we’ve topped.  They’ve proven they don’t need a catalyst to slam on the brakes and go back the other way.  I think drops come as a shock because we’re lulled into the thought of a steady market by its action.  It’s funny how quickly the world must be coming to an end when we drop quickly for any length of time.  It’s a more intense feeling then going up for me.  Both of those make for good bear traps.  Just the same, I think we’ll be down tomorrow after opening higher.  If I’m wrong, then I think we’ll be shooting up again to new levels.

30 months matt, i call that cooking the books my friend

Phil
Thanks for the guidance re your thoughts on X and steel in general….. sold with a terrific profit.. I still maintain a substantial position in PKX (Posco), and am staying the course with it on a long term basis, This 35 Bil company in Korea announced a Q to comparitive Q of a 50% operating profit increase, and an increase of 10.5% increase in sales. It appears there is demand for steel in Asia that may not exist elsewhere. My feeling the increase is primarily China demand, an it will probably continue.

Wow.  I just watched The Warning on the PBS website.  The show wasn’t on the station here tonight.  I’m blown away.  How on earth can Obama be considered an agent of change with the cast of characters he has around him right now?  Summers, Geitner and Bernanke.  Rubin and Greenspan should be pilloried.  Greenspan was right.  The markets always do correct.  In this case, they should have corrected these dumb ass companies out of business.  Too big to fail companies and free market economies are diabolicaly opposed to each other.  Since we are stuck with them, they need to be split up and regulated seperately.  And derivatives need to be outlawed. 
 
How is it that if I have $5 billion dollars and then go out and write contracts worth up to $1 trillion against that $5 billion it’s called ‘leveraging’ and not FRAUD?

I missed it but its on their website….pbs frontline
http://video.pbs.org/video/1302794657

 Comcast has "The Warning" available on demand

This should inspire confidence in our elected officials:
 
Democratic Sen. Claire McCaskill apparently believes that a healthcare public option would apply only to those who are currently uninsured.  She posted this brilliant thought to her Facebook and Twitter pages.
http://twitter.com/clairecmc
 
"I’m not sure that everyone understands that a public option will only be available to those who don’t have insurance coverage, not everyone."

Scary …

Galleon funds are facing redemptions and have $3 B to liquidate. I am suspecting that this sell off had something to do with that.

If you have any doubts that the Gov is controlled by the power elite in this country then you need to view this program. The Warning on PBS.

HONG KONG, Oct 21 (Reuters) – Jiangxi Copper (0358.HK), China’s largest integrated copper producer, said on Wednesday its quarterly earnings fell 46 percent due to lower copper and sulphuric acid prices.
 
Copper prices continued to rebound in the third quarter on strong China demand and has roughly doubled since the beginning of the year, but on average remain below levels of the same period last year.
 
Jiangxi Copper (600362.SS) reported net profit for the July-Sept period of 560.94 million yuan ($82.18 million), down from an adjusted profit of 1.04 billion yuan a year ago, based on Chinese accounting standards.
 
The company is set to benefit along with the recovery of copper prices, driven up by China’s 4 trillion yuan infrastructure-focused stimulus programme.
 
Shanghai copper prices rose to near six-week highs on Tuesday helped by a weak U.S. dollar. Shanghai’s benchmark three month copper SCFc3 rose 18 percent in the third quarter.
 
Analysts forecast Jiangxi Copper will post a yearly profit of 2.63 billion yuan — up 15 percent — according to a survey by Thomson Reuters I/B/E/S. That suggests the company may record higher profits in the fourth quarter.
 
Panic selling amid the global financial crisis caused a global copper slump in the second half of last year that saw copper prices beaten down from record highs to three-year lows. The metal is used heavily in power and construction.
 
Jiangxi Copper said its turnover fell 14.5 percent in the third quarter to 13.05 billion yuan.
 
For earnings table please read [ID:nHKG213976]
 
The firm aims to make 800,000 tonnes of copper in 2009. It said in September it planned to expand annual capacity of refined copper by more than 10 percent to 1 million tonnes by 2012. [ID:nSHA202169]
 
Jiangxi Copper’s share price has risen 37 percent in the third quarter and closed up 0.2 percent at HK$18.90 on Wednesday.
http://www.reuters.com/article/basicMaterialsSector/idUSHKG21012520091021

we’re all peasants lol you ll never see this on CNBC
http://www.youtube.com/watch?v=pFMgwL-Tq4s

FAZ: Phil, I’m in an FAZ  buy/write with Nov. 18 puts and 21 calls. I have a 50% profit on the puts and about a 30% profit on the calls. I’m thinking of closing out both until I see which way the market is headed. Do you think that makes sense or should I roll out to Dec options with perhaps a wider spread: 17 puts and 22 calls for $3 premium?

I have been watching the futures rise in the face of an Asian sell off and European futures are down

Peasants he says!  That was lively.  Now I don’t need that coffee… uh, yes I do.

Peasants- "banks are stealing money" – so, this is something new?
http://wiki.answers.com/Q/Where_in_the_Bible_is_the_story_of_Jesus_and_the_money_lenders

Phil,
Are you still OK with the long spread on C Jan 2011 5/7.50 or should I get out of it.?

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